South Korea is set to confront fast-paced changes in economic conditions stemming from the heightened tensions in the Middle East, as Iran on Tuesday launched direct missile attacks on Israel.
Iran’s attack -- a barrage of 180 ballistic missiles -- was intended as retaliation for the killings of top Hezbollah and Hamas officials, Tehran said. The surprise move came after Israel carried out a ground invasion of Lebanon. As Israeli Prime Minister Benjamin Netanyahu issued a strong warning, observers across the world fear that a full-blown regional war may break out, a scenario that would send shocks throughout the world on multiple fronts.
On Wednesday, South Korea’s top government officials pledged that the country will stay vigilant against escalations in military confrontations in the Middle East by stepping up market monitoring and drawing up new measures.
In the tightly interconnected global economy, large-scale military clashes in the Middle East could disrupt logistical networks and spook investors. Korea’s financial market and its real economy will be exposed to higher volatility in various sectors if the confrontation between Israel and Iran expands.
The rise in tensions wiped out short-lived optimism about the Korean economy that was finally showing signs of a welcome upturn. The country’s industrial output rose for the first time in four months in August, helped by solid production in the automotive and semiconductor sectors, according to data released by Statistics Korea on Monday. Retail sales, a key indicator for private spending, also recorded the biggest increase in 18 months in August.
Unlike the conflicts involving Hezbollah and Hamas, which have a limited regional impact, a full-blown war between Israel and Iran -- two of the strongest military powers in the Middle East -- could affect the global economy in a sweeping fashion, especially regarding oil prices and logistics.
As Israel seeks ways to respond to Iran’s missile attack, US President Joe Biden said that he will not support an Israeli attack on sites related to Iran’s nuclear program, a comment that came after he spoke with world leaders about new sanctions on Iran. Countries led by the US are trying to contain the spreading conflict in the Middle East, which was initiated by Iran-supported Hamas militants' attack on Israel on Oct. 7, 2023.
What plays out in the Middle East matters for the Korean economy, whose key export items depend on external demand. If a full-scale war hits the world, it will send oil prices soaring, which in turn will reignite inflationary pressures.
Korea has been expected to cut interest rates following the recent 50-basis point rate cut by the US Federal Reserve, but the heightened military clashes in the Middle East could force the country to maintain its current interest rates, a factor that could hamper a recovery in the domestic economy.
Oil prices also worry government officials. Shortly after news came out about Iran’s missile attack, international oil prices spiked more than 5 percent during trading hours, driven by fears of an expanded war.
It is widely expected that an escalation could intensify demand for safe-haven assets, leading to gyrations of the Korean currency's value against the US dollar and higher volatility in financial markets in general. Moreover, Korean companies’ business projects linked to the Middle East may be delayed or canceled due to safety reasons.
The Korean government must weigh various emergency scenarios across the economic and security fronts while coming up with ways to deal with potentially severe disruptions triggered by unforeseen developments.
